Day 1: Weblights

Yesterday we spent the day hopping from webcast to webcast focusing on unique callouts from a slew of company presentations. Here are the notable takeaways:

A couple of interesting callouts from Kroger’s 2Q conference call:

The competitive environment remains largely a mixed bag, with some markets becoming more aggressive and others becoming less aggressive. Net, net management described the environment as being slightly more rational, although inline with expectations.

Deflation and inflation co-exist within the store. On the produce side, inflation has begun to creep into product costs although still at a slightly lower pace than originally expected at the beginning of the year. On the flip side, the grocery area is seeing deflation which is largely the result of vendor driven promotions. Management believes the CPG companies are now in the phase where they are focused on driving volume via promotional support. Interestingly, this scenario is positive for KR gross margins while still a drag on topline performance.

For the first time in a while, management noted that sales strength was broad-based. This includes positive idents in 17 of 18 regions. All departments and customer segments showed increases.

Management noted that its seeing some gross margin benefits from positive mix, which has been skewing towards more discretionary products. Starbucks, service counter deli, Boars Head, and natural foods were called out as showing improving sales trends.

Best Buy noted that it expects to see a slight acceleration in same store sales over the back half of the year, despite tougher comparisons. This is largely due to new product introductions (3D and motion gaming, tablets, and e-books) as well as an expectation that vendor supported promotions will pick up to spur TV demand.

BBY is extremely bullish on its Best Buy Mobile business, as it was cited as the primary reason from gross margin upside in the quarter. Interestingly, management sees a huge opportunity to gain additional share in the wireless business (only 5% now) as well as growth in other areas of connectivity. Broadband, 3G, and HD cable or satellite are all products for which BBY collects an incentive fee for new customer acquisition.

Office Depot noted that the company is not assuming any material improvement in the economy through 2011, and as such is planning conservatively. Despite this view, the North American retail business did see a slightly positive comp through the August back to school period. This marks a slight improvement from the prior quarter, which declined by 1%.

Kohl’s noted that the two most inflationary categories in the store, some home and footwear, are also the two best performing categories year to date. Management went on to note that inflation is not necessarily a bad thing if managed properly, especially in the apparel category.

Kohl’s highlighted a recent social media (Facebook) campaign, which was centered on giving money to schools as part of a back to school marketing effort. Prior the campaign, the company had 1 million fans. In just over 2 months since the campaign began, Kohl’s now has over 2.6 million fans.

Aeropostale noted that is having to promote a little more aggressively than it has in the past, especially on key items. Graphic tees have been the most heavily promoted category in the teen space (probably the most profitable as well). Management went on to note that a sustainable high teens operating margin would be largely dependent on an improving economy over time.

From a fashion standpoint, Aeropostale noted that they are seeing the beginnings of a resurgence in khakis and twills. This coincides with some weakness in the denim category, which has been impacted by an over-distribution of skinny jeans, unseasonably warm weather, and lack of differentiation within the category.

JCP noted early enthusiasm for the company’s launch of Liz Claiborne, although it refrained from providing any details. The company’s first circular highlighting the launch drops this weekend.

Much like Kohl’s, JC Penney management noted that inflation would not be such a bad thing for the apparel category. Management is only expecting modest 1-3% cost increases into the Spring as the company’s internal sourcing organization navigates rising costs out of Asia.

The future of the women’s business was a key topic of discussion for Under Armour. Highlighting the success of its partnership with Nordstrom, CEO Plank mentioned that it is in a testing phase at Bloomingdales and early indications are positive. Among the benefits of offering a more expansive assortment in women’s including more outerwear are the opportunities for distribution growth particularly at the higher-end, which is clearly underway.

Despite concerns over a dilutive competitive environment in Texas over the last 12-18-months, Dick’s Sporting Goods confirmed that dynamics have indeed improved with the market now comping at a faster rate than the company on a consolidated basis.

PSS confirmed that of the $28mm it can allocate to stock repurchase this quarter, it will indeed purchase every share possible with the stock at these levels.

Eric Levine

Director

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09/15/10 10:46 AM EDT

Are We Bearish Enough On the Democrats Heading Into The Midterms?

Last week we hosted a call with Karl Rove, former Deputy Chief of Staff at the White House, to discuss whether the midterm elections could be a major stock market catalyst. Our basic premise heading into the discussion was that if the Republicans gain enough seats, it would be a strong repudiation of the Obama administration’s economic policies and, potentially, lead to an extension of the Bush Tax Cuts, both of which would be positive for the stock market in the short term.

The discussion with Mr. Rove was fascinating on many levels, but most importantly it gave us an opportunity to pick the brains of one of the more successful political strategist of the modern era. Whether you like his politics or not, Rove has won many elections. In fact, of the more than 40 races that he has been the primary strategist for, he has won more than 80% of them. A key take way from our discussion with him was that trends matter in elections, and they are difficult to overcome in a short period of time. Further, the direction of these trends is a leading indicator for the next electoral data point. (Sound a bit like the stock market?)

While polls on an individual basis can be wrong, in aggregate they typically provide compelling insight into the electoral landscape. Currently, we are focused on four specific polls whose trends make us believe that we may not be bearish enough on the prospects for Democrats in the midterm elections. Specifically, these polls are: Presidential job approval, the generic congressional ballot, approval of Congress, and enthusiasm for voting.

Presidential Job Approval

This poll is the best proxy for how the President has been doing, and while his approval may not be a function specifically of his policy (i.e. the economy which he can’t control could be the issue), it is a reflection of how he is being perceived. The Real Clear Politics poll aggregate currently shows President Obama with a -2.5 spread on approval, which is the difference between Approve (46.6) and Disapprove (49.1). While this isn’t quite the lowest rating of his Presidency, it is right near the bottom. More importantly, he started his Presidency with a +44.2 spread and the trend since his election has been straight down.

The key implication of a negative approval rating for the President heading into the midterms is that Democrats will try to distance themselves from him, and in doing so won’t be able to use the natural fund raising and bully pulpit abilities that come along with the President campaigning on your behalf.

Generic Congressional Ballot

The Generic Congressional Ballot measures which party those polled would vote for if the choices were generic. According to the Real Clear Politics Aggregate, the Republicans have +7.8 advantage over the Democrats in this poll based on spread of 48.1 to 40.3. This is noteworthy given that in Obama’s first week in office this same measure had the Republicans at 34 and the Democrats at 48 for a +14 point Democratic advantage. This is an amazing reversal for the Republicans as we’ve seen an almost 22 point swing in preferences in just two years.

Approval of Congress

As we’ve been writing for months to our clients, the anti-Washington sentiment is as high as it has ever been in this country. The best measure for this is approval for Congress. Currently, and once again according to the Real Clear Politics Aggregate, almost 72% of those polled disapprove of Congress, while only 23% approve. This is a clear and strong statement against incumbency and since the Democrats current control the Presidency, the Senate, and the House, they are overwhelmingly viewed as the incumbents.

Voting Enthusiasm

One of the best polls we’ve seen for evaluating voter enthusiasm is the Gallup Poll that measures the “thought given to the election” by those polled. In the most recent results from this poll on September 2nd 2010, 54% of Republicans indicated they had given some thought to the election, compared to only 30% of Democrats and 32% of Independents. This is in stark contrast to this poll during the last midterm, which showed Republicans slightly lower at 53%, but the Democrats at 52%. Amazingly, the current spread between Republicans and Democrats on the measure is 24 points, which is the widest Gallup has ever measured in this poll going back to 1994.

While some Republican Party officials have recently been talking down their chances in the midterms, the numbers in the polls outlined above and in the table suggest just the opposite. In aggregate, Republicans are motivated, are being clearly favored by registered voters, and do not have the disadvantage of being led by an unpopular President. Moreover, these measures have all been trending in the favor of the Republicans for the last two years and will, absent an October surprise, likely continue to do so through the midterms.

There is a consensus view, which was shared by Mr. Rove in our discussions, is that the Republicans will take back the House of Representatives and likely not wrest control of the Senate. The question in our minds after reviewing the data and trends is: are we bearish enough on the Democrats heading into the midterms? We think not. In fact, the real October Surprise will likely be a historic win for the Republicans in which they have a strong majority in the House and take back the Senate.

That being said the wild card remains the Tea Party and their influence on the primaries as we are seeing today in Delaware with the success of radical candidate Christine O’Donnell who won the Republican nomination. As our friend Mr. Rove said last night about this victory:

“It does conservatives little good to support candidates who, … while they may be conservative in their public statements, do not evince the characteristics of rectitude and sincerity and character that the voters are looking for. … There’s just a lot of nutty things she’s been saying. …”

Indeed.

Daryl G. Jones Managing Director

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09/15/10 10:19 AM EDT

COMMODITY HEADLINES

This morning has brought some striking commodity market headlines. Restaurant stocks have been rallying on the back of M&A and slightly better sales trends in the casual dining space, but we can’t lose sight of the fact that commodities are trending higher.

Corn could see more gains today, with nearby futures taking aim at the $5 level after making new 23-month highs yesterday. Harvest delays and worries about falling yields are attracting more outside money willing to bet on the bullish trend.

Below is a selection of some interesting headlines in the commodity markets today:

GOLD: Gold futures rose to a record $1,276.50 an ounce on demand for a haven against turmoil in the global economy and financial markets.

CORN: Corn futures rose, extending a rally to the highest price since October 2008, on speculation that the U.S. crop will be smaller than the government forecast after hot, dry weather reduced yields.

COTTON: Cotton extended a rally to the highest price in 15 years amid tightening global supplies. India, the world’s second - biggest cotton grower, plans to delay registration of export contracts by two weeks until October 1. The condition of the crop in China, the largest producer, has deteriorated compared with a year earlier after low temperatures and prolonged rains delayed planting.

SOYBEANS: Soybeans rose for a second straight session on speculation that the dollar’s decline will increase demand for commodities as an alternative investment and hedge against inflation.

SUGAR: Sugar futures surged to a six-month high on speculation that producers will struggle to meet demand after

unusual weather damaged crops and disrupted shipments. Russia’s sugar-beet crop will total 2.65 million metric tons this year, the country’s Institute for Agricultural Markets Studies said September 9th, lowering its August 28th estimate by 5% because of the worst drought in half a century.

HOGS: Hog futures had the biggest gain in almost four weeks as a rebound in U.S. pork prices may boost profit for meatpackers and encourage higher bids on animals for slaughter. Wholesale pork jumped 1.6% to 91.27 cents a pound yesterday.

COFFEE: Coffee output in Brazil, the world’s biggest producer, may be hurt by the driest weather in four years as trees start flowering for next year’s crop, a growers group said. The dryness may pare the amount of beans that trees will yield next year.

The CRB Foodstuffs index has been a moonshot since the beginning of July.

Howard Penney

Managing Director

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According to Community Development, Youth and Sports Minister, Vivian Balakrishnan, Singapore's two casinos have breached regulations that prohibit promotional activities aimed at locals and may be penalized by the local regulator. "I can't speak for the Casino Regulatory Authority whether they are contemplating any penalties to be imposed. There is a due process. They will make appropriate decisions at the regulatory level. CRA has reminded the IR (integrated resort) operators that they must comply strictly with our rules against casino advertising to locals. CRA will tighten these rules as necessary in the light of experience," Balakrishnan said.

MELCO CROWN EXPECTS BIG REVENUE JUMP IN MACAU Reuters

CEO Ho expects a "big jump" in Q3 and Q4 revenues. Ho believes MPEL's mass and slot market businesses would be ramped up aggressively. Ho added that a membership scheme for its casinos would likely expand from 380,000 to 500,000 members by the end of this year. Ho expects 50% growth in GGR this year and 15-20% growth for 2011.

LAS VEGAS SANDS: NOT SIPHONING PROFITS FROM INDEPENDENT HK UNIT WSJ

Adelson reassured investors the LVS wasn't attempting to siphon revenue from Sands China. "I want Sands China to be as successful as Las Vegas Sands is," he said. "No bank or any investor has ever complained that I've cannibalized, that I've shifted profits from one to the other."

Las Vegas Sands will change its name to Sands International or Sands Resort International at its next board meeting "to reflect more that we're not just in Las Vegas," he said.

Adelson doesn't see a MBS IPO any time soon. However, he said there is room to sell the IR's retail mall business operations if needed. Regarding the number of Singaporeans visiting the integrated resort, he estimates less than 1/2 of the visitors to the resort's casino are Singapore citizens or permanent residents, based on the casino's daily list of top winners and losers. In addition, Adelson believes ~10% of all casino income will come from Singaporeans once the facility is fully operational.

PRIVATE HOME SALES SLOW Strait Times

According to URA, Singapore developers sold 1,248 new private homes in August, down from 1,549 units in July but up from the 847 units in June.

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09/15/10 09:16 AM EDT

R3: BBY, RL, UA, LIZ, SHLD, COST, and COLM

R3: REQUIRED RETAIL READING

September 15, 2010

Keep an eye on Skechers, which is now receiving some heat for producing a kids cartoon. Unfortunately, the FCC doesn’t allow the use of children’s cartoons as vehicle to sell or promote products. In other words, “Zevo-3” was looking a lot like a cartoon version of an infomercial.

RESEARCH ANECDOTES

- Best Buy noted that it expects to see promotional support increase over the back half of the year in an effort to spur demand in the TV category. Management believes there is pent-up demand for the category, and vendor driven promotions may be key to reinvigorating sales growth. Additionally, it was noted that home theater sales at the company’s Magnolia brand were improved, which could also be a leading indicator as prices drop on newer technologies.

- The future of the women’s business was a key topic of discussion for Under Armour yesterday. Highlighting the success of its partnership with Nordstrom, CEO Plank mentioned that it is in a testing phase at Bloomingdales and early indications are positive. Among the benefits of offering a more expansive assortment in women’s including more outerwear are the opportunities for distribution growth particularly at the higher-end, which is clearly underway.

- Despite concerns over a dilutive competitive environment in Texas over the last 12-18-months, Dick’s Sporting Goods confirmed that dynamics have indeed improved with the market now comping at a faster rate than the company on a consolidated basis.

- Fleet Feet, a 90 store chain of specialty running shops, reported a same store sales increase for the first half of the year of 11%. Recall that the performance running category has been a key driver of both ASP’s and the strength in the athletic footwear sector.

- The ultimate UGG’s have arrived. In a rare collaboration, the sheepskin bootmaker has teamed up with Jimmy Choo to offer a luxury version of the classic boot. The boots which are studded and embroidered range in price from $595 to $795. Expect to see these at Saks.

OUR TAKE ON OVERNIGHT NEWS

Ralph Lauren Takes Rugby International, Quietly - On Wednesday, the company opened its first Rugby boutique outside the United States: a 4,300-square-foot store in Tokyo that occupies a large corner of the sprawling Ralph Lauren flagship on Omotesando Ave. The boutique, featuring mosaic floors and wood interiors, attracted a modest line of about 20 or so folks- some decked out in Ralph’s finest- before the doors swung open. Ralph Lauren feted the boutique with a party Tuesday night but the home office in New York turned down requests for photo previews and interviews to talk strategy. Rugby, a lower-priced brand than others in the Ralph Lauren stable, is moving into the Japanese market at a time when consumers are definitely trading down to fast fashion and diffusion collections. Hennes & Mauritz, Forever 21 and Topshop are all busy expanding in the country. <wwd.com/business-news>

Hedgeye Retail’s Take: Smart move to plant the seeds while the brand is still growing up. Perhaps Abercrombie’s flagship opening in the same city gives Rugby a sneak peak at the Japanese consumer’s preference for all things preppy.

Sears Holdings Launches UK Style by French Connection - Sears Holdings Corp. will launch UK Style by French Connection this spring, in a daring collaboration between two brands from different continents with little in common other than striving to lift their underperforming businesses. UK Style by French Connection will be sold exclusively at Sears stores starting in March for spring. It will offer contemporary clothing and accessories for women, men and children, and possibly eventually broaden into home goods and fragrance. The collection will be available on sears.com. LF USA’s Regatta division will source, develop and manufacture the collection. <wwd.com/retail-news>

Hedgeye Retail’s Take: Yet another example of Sear’s playing catch up, this time with a brand that has dramatically reduced its U.S. presence over the past few years. KSS, JCP, and TGT still have an edge here on fashion collaboration.

Sears and Target Move up In m-Commerce Site Performance Index - Sears rose seven spots and Target four on the weekly Keynote Mobile Commerce Performance Index, bursting into the top five performers on the index of 15 m-commerce players. For the week beginning Sept. 6, Sears came in third with an index score of 756 out of 1,000, its m-commerce site home page loading on average in 6.47 seconds and loading successfully 99.33% of the time. Target came in fourth with a score of 751, its mobile home page loading in 4.96 seconds with a success rate of 98.94%. Walmart.com came in first with a score of 865, and Barnes and Noble came in second at 811. <internetretailer.com>

Hedgeye Retail’s Take: While somewhat complex to build, we remind investors and the industry that “m-Commerce” is nothing more than e-commerce on a smaller screen. There are great opportunities to use location based services to better target customers, however we are still a couple of years away from mass adoption of such technologies.

Costco.com Crashes for 3 Hours During Holiday Sale - Costco.com, the e-commerce site for warehouse club retailer Costco Wholesale Corp., crashed and went offline for approximately three hours on Labor Day, Sept. 6. The outage occurred from about 11 a.m. to 2 p.m. Eastern Time, according to web monitoring service Gomez. Ginnie Roeglin, senior vice president of e-commerce at Costco, confirmed the crash to Internet Retailer but declined to disclose the cause or its impact on sales. Costco.com was running a Labor Day sale when the outage occurred. <internetretailer.com>

Hedgeye Retail’s Take: Interesting to see such a surge in traffic for Costco, which is not normally a promotionally driven, high-low retailer. We suspect this was a vendor supported promo that was clearly a great deal.

Hedgeye Retail’s Take: The partnership here highlights the need to remain close with the independent outdoor shop community, despite the dominance of chain stores. The Grassroots Alliance is a trade organization made up of independent outdoor retailers.

LIZ's Kate Spade Makes Some Management Changes, Launches Apparel, Jewelry, Handbags, and Fragrances - Craig Leavitt, co-president and chief operating officer, has been named chief executive officer, a new post. Deborah Lloyd, co-president and creative director, has been tapped as president and chief creative officer. Both will continue reporting to William L. McComb, ceo of Liz Claiborne, which has owned Kate Spade since 2006. Leavitt and Lloyd have worked in tandem since 2008 to improve both the Kate Spade product and retail experience in an effort to create a global lifestyle brand. Kate Spade has begun a global push, including a new joint venture in Japan with partner Sanei, with plans to open stores in Japan, China and Korea. Kate Spade has 39 freestanding units and 29 outlets in the U.S. In addition, Kate Spade has launched apparel, jewelry and a fragrance, Kate Spade Swirl, as well as evolving the handbag collection and the Jack Spade label. <wwd.com/business-news>

Hedgeye Retail’s Take: One of the few highlights in the LIZ portfolio, Kate Spade has done surprisingly well evolving away from its core canvas handbag roots.

FCC Asked to Block Skechers' New Cartoon Series - An advocacy group is asking the Federal Communications Commission to block a TV cartoon show starring characters first created to market Skechers footwear to children. The Boston-based Campaign for a Commercial Free Childhood targeted the series called "Zevo-3" that's scheduled to premiere Oct. 11 on Nicktoons. <sportsonesource.com>

Hedgeye Retail’s Take: More negative PR for the footwear brand, which recently announced it was producing its own cartoon series. Unfortunately, it’s essentially illegal to turn a cartoon into an infomercial, which is why the series is being called into question. After all, why would SKX produce a cartoon if it wasn’t trying to sell kids shoes?

AAFA Urges Members Not to Respond to Trucking Survey - The American Apparel & Footwear Association is instructing its members not to respond directly to a survey by the trucking industry, arguing it requests proprietary information and could be used to justify massive rate hikes for apparel shippers. Instead, the AAFA wants member companies to send responses to it so it can produce its own study to counter a possible rate hike. <sportsonesource.com>

Hedgeye Retail’s Take: Recall that the initial survey was requested in response to an effort to reclassify clothing under the Commodity Classifications Standards Board. Essentially, any change in classification would increase trucking rates, which is why the AAFA is trying to protect the sharing of proprietary member information.

Apparel and Textile Imports Post 3rd Straight Month of Double Digit Increases in July - Combined shipments of textiles and apparel rose 23.2% in July to 5.2 bn square meter equivalents. Apparel imports rose 14.3%, while textile shipments increased 31.3%. The majority of the top 10 textile and apparel suppliers continued to increase shipments to the U.S. in July, but at a slower pace than in June. Import volume in July was the second highest monthly level since 2005; the June mark was the highest. <wwd.com/business-news>

Hedgeye Retail’s Take: Nothing like easy compares against what was likely one of the worst periods for imports in the prior year. Overall, despite the surge, inventories appear to be in good shape at retail. Demand remains unchanged.

The World Of Fast Fashion - Fashion on demand is here, from sped-up deliveries at Burberry to businesses in which the consumer acts as buyer, backer and even the designer, and can get the products to her door within weeks if not days. Driven by the Internet, new forms of retail combine urgency with mobile commerce, social media, gaming and crowdsourcing. The growing power of the consumer is stirring the potential of a tug-of-war with the brands themselves as shoppers demand exactly what they want and how they want it — and they want it right away. The balance of power between retailers, shoppers and brands began to shift long ago, but now consumers are no longer content to steer the fashion vehicle — they want to own it. There are brands like Burberry, which are fully embracing the rush to immediacy. Burberry this season not only will live-stream its show but will enable customers to order select pieces that will be delivered directly to them within seven weeks. <wwd.com/retail-news>

Hedgeye Retail’s Take: What is most amazing here is that the consumer is essentially getting what they want, when they want it. Seems so simple, yet it has taken so long for technology to facilitate this high level of customer satisfaction.

Sri Lanka: Garment Exports Expand Into New Markets to Reach $5 bn - Sri Lanka’s garment industry targets to generate $5 billion business in five years despite recent losses due to the withdrawal of GSP Plus duty free status to the EU. According to the former Secretary General of the Joint Apparel Association M.P. Tuly Cooray, the value addition of the garment industry has grown from 30-35% to 60-65%. Before the suspension of GSP Plus Scheme, garment exports to the EU increased up to $1.6 billion last year from $1,025 million in 2005. <fashionnetasia.com>

Hedgeye Retail’s Take: Yet another non-Asian country that is looking to gain share as prices rise in the traditional manufacturing basin. Political stability will be key to the government’s efforts to more than triple current garment exports.

UK Retailer Next Doesn't See Meltdown in Consumer Spending - Next chief executive Lord Simon Wolfson has issued a cautiously optimistic outlook on trading prospects, forecasting that there would be no double dip recession or “meltdown in consumer spending” at the retailer’s half-year results today. <drapersonline.com>

Hedgeye Retail’s Take: It would be more interesting if we actually heard a CEO express that they believe a meltdown IS on the horizon. Not the words we will ever hear from a CEO however.

Gilt Goes Local and Male - The flash sale site has started to roll out local deals in six cities, along with a Facebook sweepstakes. And in another move designed to boost sales, Gilt launches a site where men can learn about fashion, grooming, manners, food and drink. <internetretailer.com>

Hedgeye Retail’s Take: All of a sudden Gilt has become an online mall of sorts, mixing off-price, editorial, and local (think Groupon) promotions into one. This is what happens when availability of high profile fashion apparel dries up.

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09/15/10 09:04 AM EDT

THE DAILY OUTLOOK

TODAY’S S&P 500 SET-UP - September 15, 2010

As we look at today’s set up for the S&P 500, the range is 21 points or -1.26% (1,107) downside and 0.62% (1,128) upside. Equity futures are trading lower flat-to-fair value as recent momentum appears to have run out of steam. Today's macro highlight includes NY Fed's Empire State Manufacturing Survey for September and August Industrial Production. Production in the U.S. is estimated to have slowed in August, increasing 0.2% after a 1% in July as automakers scaled back following a surge in output last month.

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